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Carsten Brzeski's blog

ECB Meeting: Summer lull in Frankfurt

All ECB watchers who had booked a July vacation had clearly taken a wise decision: today’s ECB meeting did not deliver any new insights on the future path of the ECB’s monetary policy. ECB President Draghi kept all options for more monetary action open; nothing more and nothing less.

As expected, the ECB kept interest rates on hold and also did not announce any changes to its unconventional measures at today’s meeting. Some market participants had speculated that the ECB could present some new measures. However, the meeting actually came both too late and too early for the ECB to act in response to the Brexit vote. It came too late to counteract any market turbulence, as markets have calmed down since the vote, but it also came too early for the ECB to have any idea on the direct economic impact from Brexit on the Eurozone economy. This impression was supported by Draghi’s comments during the press conference. Draghi’s introductory words were almost a verbatim copy from the June meeting, the only difference being that the Brexit vote was a downside risk which had since become a reality.

Draghi’s words and comments during the press conference did not give any hint on possible next ECB steps. Draghi kept all of his cards to his chest. The sentence “over the coming months, when we have more information, including new staff projections, we will be in a better position to reassess the underlying macroeconomic conditions, the most likely paths of inflation and growth, and the distribution of risks around those paths” summarizes the main message of today’s meeting: more action in September is possible, though not a done deal yet.

In the absence of any hints on monetary policy, two other messages from today’s ECB meeting were remarkable: the scarfing of the ECB’s language for Eurozone governments by stressing that structural reforms had to be “stepped up” and the remark that the problem of non-performing loans should be solved. As regards the latter, Draghi refrained from direct comments on Italian banks. Instead, Draghi remarked that markets and governments had to deal with the non-performing loan problem and that a public backstop would be very useful. In particular, he mentioned three pillars to a possible NPL solution: “a consistent supervisory approach, the development of a fully functioning NPL market and government action in passing that legislation that would foster the development of an NPL market. And possibly also having a public backstop.” According to Draghi, the problem to address was the weak profitability of banks, not the solvency.

Back to monetary policy: Draghi dodged all questions that sought potential hints on future action. According to Draghi, the ECB had not discussed the issue of bond scarcity, neither had it discussed new stimulus. Probably knowing that this message could disappoint markets, Draghi tried to sound at least a bit more dovish by summarizing the ECB’s stance as “ready, willing, able to act if needed”. What sounds like a strong message was just a repetition from previous press meetings.

All in all, today’s meeting was one that will quickly disappear from memories. More action in September is possible but not yet a given. It also was a meeting which might have brought back the desire for a relic from the past: a summer ECB meeting without a press briefing.